Outlook turns bleak for gold

Rajalakshmi Nirmal | Updated on November 25, 2017



Easing tension in Ukraine and stronger dollar put the yellow metal in a spot

The easing of tension in Ukraine, the stimulus announced by the European Central Bank (ECB) and the subsequent strength in dollar have worked to the disadvantage of gold.

The yellow metal cut its key support at $1,260/ounce and fell to a low of $1,257 last week.

But as the US jobs data released on Friday was not as strong as expected, the metal recovered slightly and closed at $1,268.8/ounce, down 1.4 per cent for the week.

The US non-farm payroll report showed that 1,42,000 jobs were added, lower than the street’s expectations of 2,25,000 jobs.

The ECB on Thursday cut the interest rate from 0.15 per cent to 0.05 per cent and also promised schemes to boost the economy. The dollar popped to 83.97 on Friday and closed at 83.74, up 1.2 per cent for the week.

Silver ended 1.3 per cent down at $19.196/ounce. Platinum lost 1 per cent and closed at $1,409.8/ounce.

The US SPDR Gold Trust, the largest gold-backed, exchange-traded fund in the world, saw investors continue to sell their units and move away. On Friday, the fund reported a holding of 785.7 tonnes, down from the previous week’s 795 tonnes.

In India too, gold prices dropped sharply following the trend in international prices as rupee stayed almost flat.

Gold price in spot market dropped to ₹2729 per gram, down 2.2 per cent.

Cues to watch

This week, the US economic calendar is light with only the weekly jobless claims data on Thursday. On Friday will be the release of retail sales numbers.

Traders, however, need to keep an eye on developments in Ukraine. With the EU zone suffering de-growth and Russia’s food import ban hurting them more, there may be positive developments from the talks between Russia and Ukraine.

If this happens, it will be negative for gold. Reports are making the rounds that Ukraine and pro-Russian rebels reached a ceasefire agreement on Friday.

Investors have to also watch out on the dollar. The dollar has been moving up at a breathtaking pace (see the infographic) since May. With the US likely to wind up its QE by next month, the dollar is set to strengthen further.

Just before the launch of QE in 2009, the dollar index was at around 89 levels.

At 83.7 now, the dollar index is moving towards the target of 89. Gold may either move sideways or slip further down from here, with little chance of a significant rally, unless there is escalation of geo-political tensions.

Already gold ETFs are seeing large outflows, showing investors’ disinterest for the yellow metal.

Now, if dollar continues to strengthen, gold will turn pricey for consumers in emerging markets and gold’s consumption demand may also drop.

Domestic investors

In the domestic market, gold futures traded on MCX dropped 2.2 per cent to close at ₹27,378 (per 10 gram) for the week.

Rupee stayed almost flat, closing at 60.41 from 60.51 in the previous week. If the currency continues to be stable around 60 levels, there may not be much support expected from rupee.

On the chart

Spot gold prices in the international market fell to a low of $1,257/ounce last week before bouncing to close above $1,260 levels. This is some breather for gold bulls.

However, the trend remains down. There is a likelihood of prices testing $1,250 and moving further down, targeting $1,200 levels. Prices may remain range- bound, in the near future, moving between $1,260 and $1,300.

Domestic investors may find opportunities in short selling MCX gold and MCX silver; both contracts look quite bearish. MCX gold futures are moving towards their June low of ₹25,755. This week, a fall below ₹27,200 could pull the contract to ₹27,000 and ₹26,400. On the upper side, if it cuts ₹27,800, it can move to ₹27,900 and ₹28,200.

MCX Silver futures may move towards ₹41,000 this week, if it cuts ₹41,300. On a move up, it could target ₹42,500.

Published on September 07, 2014

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